Gold held by gold-backed ETF, which in 2012 accounted for just 6% of the world’s gold demand, fell by 177 tonnes in the first quarter according to the World Gold Council data.

ETF demand is just one facet of the broad based global demand that gold enjoys today and this fact continues to be not fully appreciated by many market participants who are tending to focus on falling ETF demand and liquidation to the exclusion of all else.

Central Banks Diversifying Into Gold Bullion “As Prices Fall”

Central banks are continuing to diversify into gold due to significant systemic and monetary risk and many will use the recent price weakness as an opportunity to diversify into gold at cheaper prices.

The Deputy Governor of the South African central bank, South African Reserve Bank, Daniel Mminele, said yesterday that central banks are “buying bullion” “as prices fall” to reach a 10% ratio of overall foreign exchange reserves – according to Bloomberg.

The South African Reserve Bank said it’s “comfortable” with its holdings of gold and doesn’t have plans to boost gold reserves because they already make up about 10% of foreign reserves.

South Africa’s central bank holds four million ounces of gold bullion.

Referring to the very low levels of gold owned by creditor nation central banks with massive foreign exchange and in particular dollar reserves such as China, the Deputy Governor said “some of these central banks would come off very low levels and are looking at getting to levels of around 10% of holdings in gold and we’re already there.”

Jewelry demand has also picked up and total jewelry demand was up 12% year-on-year in the first quarter, driven in the main by Asian markets.

Asian buyers tend to be value buyers and like buying on weakness. Their demand is not for jewelry as a fashion accessory but rather as a store of wealth to protect from bank and currency risk.

Jewellery demand in China was up 19% on the same period last year and stood at a record 185 tonnes.

Interestingly, demand for jewellery in China alone at 185 tonnes and central banks demand at 109 tonnes equals 294 tonnes of demand for physical gold bullion which is much greater than the fall in ETF demand of just 177 tonnes.

With regards to global jewellery demand in the first quarter, demand in both India and the Middle East was up 15% respectively and in the US, demand showed a significant increase, 6%, for the first time since 2005.

Demand in both India and the Middle East was up 15% respectively and in the US, demand showed a significant increase, 6%, for the first time since 2005.

Demand for gold in China and India was also driven by an increase in bar and coin sales – up 22% year-on-year in China and 52% in India. In the US demand for bars and coins was up 43% compared with the same quarter in 2012. Globally, bar investment was up 8% while official coins (such as American Eagles and Canadian Maple Leafs) were up 18%.

The fundamentals of the gold, and indeed of the silver, market remain as sound as ever and will reward those with an allocation to physical bullion – either in allocated accounts or in one’s possession.